22 October 2016
Satish Kanady
Doha - New issuance of bonds and sukuks will be an important driver of GCC market performance and risk in the fourth quarter of 2016 (Q4, 16). Issuance is expected to continue to accelerate following the summer slowdown, providing a more expansive opportunity set for investors.

Anticipation continues to build for Saudi Arabia’s debut issuance, which could happen in October, potentially altering the pattern of GCC issuance to be more consistent with Saudi Arabia’s contribution to regional gross domestic product and the size of its financial markets, Mohieddine Kronfol (pictured), CIO Fixed Income and Global Sukuk ,Franklin Templeton Investments (ME) said.

The US Federal Reserve’s (Fed) September rate decision helped introduce some clarity to the monetary policy question following shifting expectations of when and by how much the Fed would begin to normalize rates.

The debate had driven markets for some time, so the clearer picture should help reduce rate and US-dollar volatility, which, in turn, should provide the necessary backdrop for the expected issuance to come to market, particularly from the GCC. Broadly speaking, stability in rates and the dollar are positive for Sukuk and GCC bond markets., he said.

New-issue activity in the third quarter was slow at first, but picked up closer to the end of the period. Emaar Properties PJSC raised $750m from its first Sukuk sale in two years, a 10-year issue at a spread of 225 basis points (bps) over midswaps. Sharjah Islamic Bank issued a $500m Sukuk with a coupon rate of 3.084 percent. Emirates Islamic Bank tapped $250m from its outstanding 2021 Sukuk at a yield of 2.894 percent.

The original instrument had been issued in May 2016 at a yield of 3.542 percent.

“In conventional regional bond markets, Burgan Bank KPSC issued a $500m five-year senior bond at a spread of 215 bps over midswaps. Union National Bank PJSC issued a $600m five-year senior bond at 170 bps over midswaps. Qatar National Bank issued a $1bn five-year bond at a spread of 115 basis points over midswaps,” Mohieddine said.

The majority of activity in the conventional space was tapping of outstanding issues:Oman tapped $1.5bn from its outstanding issues, combining its June 2021 and June 2026 bonds. The five-year tranche will raise $500m at 235 bps over Treasuries, while the 10-year tranche will raise $1bn at 215 bps over Treasuries. Real estate and retailing company Majid Al Futtaim tapped $300m from its outstanding 2024 bond at a yield of 3.95 percent. National Bank of Oman also tapped an outstanding issue: 100 percent of its 2019 bond at 200 bps over midswaps.

Global risk assets generated fairly solid returns for the third quarter, with several overarching geopolitical and macroeconomic issues helping to drive market performance. Monetary policy continued to be one such driver during the three-month period, with speculation focused on the Fed’s possible rate increase.

Expectations of the timing of the next potential rate hike fluctuated over the quarter, seemingly in response to each major release of US economic data.

However, some certainty was introduced to the discussion when the Fed, not without some dissent among its policymakers, declined to raise rates at its September meeting, while indicating a rate increase would be likely before the end of 2016. Global stocks made solid gains in this environment.

The prospect of eventually higher rates  put upward pressure on 10-year US Treasury yields, though the Fed’s maintenance of its accommodative rate in September provided bond investors with some relief.

The emerging-market bonds generated strong returns for the quarter, with the JP Morgan Emerging-Market Bond Index Global-Diversified (EMBIGD) returning 4.04 percent. Emerging-market bonds benefited from improving fundamentals in some economies.

© The Peninsula 2016